Investment Focus: Larsen & Toubro – Buy

Investors with a three-year perspective can consider buying the stock of engineering conglomerate Larsen & Toubro. Presence across various engineering and capital goods businesses, a sound balance sheet and ability to ramp up quickly in new business segments have helped the company manoeuvre what has been four tough years since the slowdown in 2008.

At the current market price of Rs 1,423 the stock trades at 15 times its expected per share earnings for FY-14. Investors can consider buying the stock on dips linked to broad markets.

Between FY-08 and FY-12, L&T’s order book expanded by 29 per cent annually to Rs 1.48 lakh crore. Sales expanded annually by 21 per cent to Rs 53,170 crore while net profits rose 19.6 per cent a year to Rs 4,457 crore.

It is noteworthy that over this period, L&T, like its peers, had to combat the slowdown in the capital goods space as well as the lower ordering activity in domestic infrastructure and in West Asia.

But the company kept itself afloat by focussing on businesses where order flows continued. For instance, it entered the power equipment business and increased its focus in the rather competitive power transmission and distribution space. It, in fact, garnered a hefty 13 per cent market share in PGCIL orders in FY-12 from almost no presence a year ago.

Meanwhile, in the infrastructure space, it continued to bag orders despite the slowdown by focussing on its buildings and factories division, serving clients in the IT and hotels space and also real estate and airport developers.

It put on hold its shipyard business but revived it in time recently and is ready to bag orders (agreement entered in July) from Mazagon Dock for warships.

The global slowdown did not also deter it from scouting new export markets. It ramped up exports to 18 per cent of total sales in FY-12 from 10-12 per cent earlier and benefited from the rupee depreciation as well. It also did its ground work in new markets by setting up offices in Brazil and Perth.

The benefits of its entry in the power and defence space will likely accrue in the next 2-3 years. Its current order book of Rs 1.5 lakh crore covers FY-12 revenue by 2.8 times, lending earnings visibility.

Despite a strong June quarter where the company expanded earnings by about 20 per cent over a year ago, and order book expanded 12 per cent, investors will have to moderate their expectations on the earnings and order front in FY-13.

Power equipment orders have weakened as much of the ordering activity for the 12th Plan is over.

Local infrastructure projects too haven’t gained traction even as there has been a slowdown in the hydrocarbon space. L&T has also decided to consciously go slow on bidding for BOT projects as these have been capital guzzlers. Its investments and loans in subsidiaries and associates, where BOT projects are also housed, account for 50 per cent of the standalone networth. L&T may, therefore, be prudent in its plan to focus on current projects and not invest a lot into BOT for now.

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